With the rise of cryptocurrencies around the world and in New Zealand, it is important for Kiwis to understand the tax requirements of this new asset class. Unlike traditional money, which is considered a standard instrument of exchange issued by the Reserve Bank of New Zealand, the Inland Revenue Department (IRD) treats crypto as a form of property. Therefore, trading, mining, or generating interest from it is considered taxable income,often referred to as crypto income tax.
This article will help you understand the cryptocurrency basics, why it’s often called the “currency of the future,” and what specific tax advice you need for digital assets in New Zealand.
Cryptocurrency is a form of digital currency that relies on blockchain technology and cryptographic techniques to secure transactions. Unlike traditional money issued by central banks, crypto operates on decentralised networks of computers, known as nodes, which collectively verify transactions. Bitcoin, the first cryptocurrency, was launched in 2009, and since then, thousands of others—known as “altcoins”—have emerged, including Ethereum, Litecoin, and Ripple.
Cryptocurrencies promise several advantages that traditional financial systems cannot offer. Some of these are as follows:
Decentralisation:
Since no central entity controls cryptocurrencies, users will have more control over their assets. This will reduce the chance of manipulation by any government. Hence why, cryptocurrencies can enhance user autonomy.
Global Accessibility:
Anyone with internet access to cryptocurrencies, hence providing services to people who are not part of the traditional banking system. This also provides easier and quicker cross-border payments.
Transparency and Security:
Blockchain technology underlies crypto transparent and securely recorded transactions while maintaining anonymity for users.
Despite these advantages, crypto comes with challenges that can impact its role as a future currency.
Bitcoin and Ethereum are two of the most traded cryptocurrencies due to their high liquidity levels. Bitcoin is known for representing scarcity and serving as a store of value, often referred to as ‘digital gold.’ On the other hand, Ethereum is the foundation for decentralised applications and smart contracts. Less famous but still well-known is Tether, which provides stability by pegging its value to fiat currency, allowing users to move funds between volatile assets.
In New Zealand, they call cryptocurrencies property and not currency in the context of how different tax accounting rules apply to its procurement, sale, trade, and mining. Some main taxable events are the:
- Buying and Selling: Gains from selling a cryptocurrency are taxed.
- Trading: An exchange of one cryptocurrency for another could entail the realisation of capital gain/loss.
- Mining Rewards: Income is sometimes referred to as mining rewards.
- Payments: All crypto one receives as payment is taxable income.
- Staking and Interest Income: Income from staking or interest is taxable.
However, holding cryptos without any activity in regard to trading or selling does not necessitate paying taxes directly.
Crypto gains or losses are calculated based on the fair market value. A gain or loss is determined by subtracting the cost of acquisition from the value at disposal time and must be reported as part of taxable income.
Some of the records that IRD requires include dates of transactions, amounts in NZD, fees, and the type of transaction. Tools such as CoinLedger and Koinly help make this easier by automatically recording all your transactions.
New Zealand taxes crypto gains based on whether you’re considered an investor or a trader:
- Investors: Those holding crypto for multiple years report as ordinary income, taxed at regular rates. Profits from crypto sales are taxed as income, meaning they fall under your usual income tax rate (from 10.5% up to 39%, depending on your overall income)
- Traders: In New Zealand, frequent crypto traders are considered to be running a trading business, so their profits are taxed as income. This means any gains are added to their overall income and taxed according to their personal income tax rate, which can range from 10.5% to 39%, depending on their total annual earnings.
Koinly and CoinLedger are two of the popular software used for tax calculations. They enable automatic gain and loss computation, making tax reporting simpler. Additionally, these tools are compatible with major exchanges and wallets, making it easier to keep track.
Failure to report the gains made from crypto accurately and regularly would fetch penalties and audit issues. The IRD uses data-sharing agreements for tracking the global transactions of cryptos, so compliance is important to avoid fines and complications.
With digital currencies gaining higher popularity, tax legislation is inevitable to change. The IRD might revisit its strategy of cryptographic taxation with a clearer directive on capital gains and income in the near future.
Due to anti-money laundering (AML) regulations, IRD or other financial institutions will conduct investigations into the sources of funds for cryptocurrencies. When confronted with such inquiries, seeking advice from professional experts can provide you with substantial assistance.
As tax rules change, you must keep track of current regulations and also use reliable tax advisory services. With these, you can understand and fill your tax obligations and continue to manage your crypto assets within New Zealand’s regulation.
PAS provides expert tax advice in NZ to help individuals and businesses navigate crypto tax requirements. With in-depth knowledge of IRD regulations, an accounting firm like ours supports clients with crypto transactions, from trading and mining to staking and payments, ensuring compliance and optimising tax outcomes.
Navigating crypto taxes in New Zealand can be complex, but staying informed will help you make smart decisions for your financial future. With solid record-keeping, reliable tax software, and support from knowledgeable advisors, you can manage your crypto responsibly and within the law.
